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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Regis Resources (ASX:RRL) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Return On Capital Employed (ROCE): What Is It?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Regis Resources is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0058 = AU$12m ÷ (AU$2.3b - AU$146m) (Based on the trailing twelve months to December 2023).
So, Regis Resources has an ROCE of 0.6%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 11%.
See our latest analysis for Regis Resources
In the above chart we have measured Regis Resources' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Regis Resources .
What The Trend Of ROCE Can Tell Us
In terms of Regis Resources' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 0.6% from 30% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
Our Take On Regis Resources' ROCE
Bringing it all together, while we're somewhat encouraged by Regis Resources' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 65% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.